SANTA CRUZ — A key research group documenting a desalination proposal in Santa Cruz and 16 others along California”s coast warns that building and operating facilities that transform seawater into drinking water can be full of hidden costs.

In a report published Tuesday, the Oakland-based Pacific Institute finds that, while the cost of desalination has decreased during the past two decades, it is still an expensive enterprise made risky by rising energy prices and the possibility of shrinking demand.

“In some regions, seawater desalination can make an important contribution to the availability and reliability of water resources,” the report found. “However, it remains among the most expensive options available to meet water demands.”

“It”s important that these sorts of questions get answered, and really then it can allow us to have discussions about how to build plants … and also be thinking about when we build these plants,” Cooley, co-director of the institute”s water program, said in an interview.

Perhaps more importantly, if customers use less water as a result of the high costs of desalination — what the institute refers to as “demand risk” — water managers could have a difficult time justifying keeping facilities open, as has happened in Australia.

“Because of the fixed costs of the plant, reducing the output can increase the overall cost of the produced water considerably, which can further reduce demand or make other supply options more economically attractive,” the report found. “In response, water managers may temporarily or permanently shut down the desalination plant,” leaving ratepayers to pay off millions in debt with no new water produced.

Santa Cruz and Soquel Creek Water District have proposed building a desalination facility that would protect the city against drought and allow for a reduction of freshwater use to bolster fish habitat and restore overdrafted aquifers.

A Sentinel investigation found the city and the district have accounted for infrastructure improvements, permitting and property acquisition in their estimate of the project”s overall $123 million cost. However, the cost of operating the plant will be another $3 million to $4 million annually, and annual interest payments on debt for the project and a host of capital improvements could be millions more each year.

Cooley and co-author Newsha Ajami found that four of six desal plants developed in drought-stricken Australia since 2006 have been placed or will be placed in stand-by mode while officials pursue less expensive water sources amid declines in demand. Since it was completed in 2007, the nation”s first large-scale plant in Florida has often run below capacity or been placed in stand-by mode, with predictions for conservation to lower demand, the authors found.

Bill Kocher, Santa Cruz”s water director, said the institute”s findings may prove true for some projects. But Kocher stressed that Santa Cruz only will use the facility during dry periods, and that even with the debt and other fixed costs, it”s a worthwhile investment.

“I guarantee you there is going to be another drought, a nasty drought,” Kocher said. “Is that really the primary consideration? That people have an insurance policy that is going to cost you and you may not get to use it?”

The Pacific Institute, which in 2006 published an important review of desal statewide called “Desalination, With a Grain of Salt,” is planning several more reports focusing on aspects of desalination. Future reports will consider marine impacts, energy concerns and permitting.